Investors buckle up for Mr. Market’s wild ride

U.S. stock funds, ETFs bounce ahead in volatile quarter

SAN FRANCISCO (MarketWatch) — Mutual fund and exchange-traded fund investors embraced U.S. stocks again in the opening weeks of the year — only to be reminded of why they’d fled.

Black swans — those unexpected market-moving events — appeared in several places at once. Upheaval in the Middle East and North Africa, Japan’s devastation, and doubts about the strength of the U.S. economic recovery had shareholders mobbing the corner of Wall Street and Worry Street for several harried weeks in the first quarter.

Middle East upheaval and questions about U.S. economic strength cloud the outlook for stocks,
says Bernard Baumohl, chief global economist at The Economic Outlook
Group.

The uncertainty fed market volatility and sacked the broad U.S. market. The benchmark Standard & Poor’s 500-stock index
SPX, -0.23%
slid more than 6% from mid-February until the day after the ides of March.

By then many retail investors had seen enough. Too bad they didn’t hang around to capture the S&P 500’s best first-quarter since 1998.

After pumping almost $22 billion into domestic stock funds in January and February, shareholders pulled about $8.5 billion from these investments in subsequent weeks through March 23, according to the Investment Company Institute, a fund industry trade group. Read more: Fund investors sell stocks, muni bonds.

Yet, as is often the case, panicky sellers exited just as U.S. stocks found their footing. Diversified U.S. stock funds gained 6.6% on average in the quarter, according to preliminary data from investment researcher Morningstar Inc. Each of Morningstar’s domestic stock-fund categories finished the period in positive territory — though there was an 11-point spread between leader energy funds (up 13.1%) and laggard consumer staples funds (up 2.1%). Read more: Markets end disaster-prone quarter on calm note.

The S&P 500, meanwhile, posted a 5.9% quarterly return, including dividends, thanks largely to soaring energy shares and a late March rally. The Dow Jones Industrial Average
DJIA, -0.32%
weighed in with a 6.4% advance — its best first-quarter result since 1999. A representative exchange-traded fund, SPDR Dow Jones Industrial Average
DIA, -0.30%
mirrored that performance.

“The first quarter was a relatively good investment quarter for most,” said Jim Tierney, chief investment officer at investment manager W.P. Stewart. “The fact that the market has held in is remarkable, and positive.”

Change from a quarter

Indeed, the first 13 weeks of the year wound up being generous to fund and ETF investors, regardless of whether they favored small-cap, midcap or large-cap portfolios.

Small-cap growth funds led the pack with an average gain of 9.2%, while their midcap rivals added 7.8%, and large-cap growth advanced 6%, Morningstar reports. Calamos Discovery Growth Fund
CADGX, +0.00%
was the quarter’s top small-cap growth offering, rising 15.4%

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